CHAPTER SIX

Strategic Analysis
and choice

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 PORTFOLIO
ANALYSIS
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How to Plan a Corporate Portfolio?
 Thebusiness portfolio is the collection
of businesses (SBUs) & products that
make up the company.

 A SBU:
 Is a unit of the company that has a separate
mission & objectives
 Can be a company division, a product line or even
individual brands
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How to Plan a Corporate Portfolio? cont’d
…
 The best business portfolio is one that fits the
company’s strengths & helps exploit the most attractive
opportunities

 There are different types of portfolio techniques /

matrixes in use, the most well known of which are:
 The Boston Consulting Group – BCG-Matrix
(Hedley, 1977)

 The General Electric Screen – GE-Matrix

(Hofer and Schendel, 1978)
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How to Plan a Corporate Portfolio? cont’d
…
Regardless of the type of matrix used,
companies must:
Analyse their current business portfolios &
decide which businesses should receive more or
less investment

 Develop growth strategies for adding new businesses to

the portfolio, while at the same time deciding which
businesses should no longer be retained
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 The Boston Consulting Group (BCG)
Matrix
 The BCG is also known as The Growth-Share Matrix or
Product Portfolio Matrix
 It helps to identify the cash flow requirements of different
businesses in a company’s portfolio
 The BCG matrix has three main steps:
1. Dividing the company into SBUs – identification
2. Assessing the prospects of each SBU & comparing them
by means of a matrix
3. Developing strategic objectives for each SBU
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 BCG Matrix cont’d …
Identifying SBUs - According to BCG:
a company must create an SBU for each economically
distinct business area in which it operates
 a company defines its SBUs in terms of its product
markets
Assessing and Comparing SBUs – the whole
portfolio
The criteria of assessing SBUs:
 The SBU’s relative market share / relative competitive
strength
 The growth rate of the SBU’s industry / stages of the
industry life-cycle 7
 The Growth-Share Matrix

Cell 1: stars Cell 2: Question marks

High
* ?

Industry
Growth
rate

Cell 3: cash cows Cell 4: dogs

Low

High Low 8
Relative Market
Share
 BCG Matrix cont’d …
 Stars:
The leading SBUs in a company’s portfolio.
They offer attractive long-term profit & growth
opportunities – still growing but not generating
high profit

 Question marks: can become a star if nurtured

properly. To become a market leader, a question
mark requires substantial net injections of cash – it
is cash hungry

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 BCG Matrix cont’d …
 Cash cows: are cost leaders in their industries. The
capital investment requirements of cash cows are not
substantial – such businesses generate a strong
positive cash flow

 Dogs: are unlikely to generate a positive cash flow &

may become cash hogs. They may require substantial
capital investments just to maintain their low market
share.

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 Strategic implication of BCG Matrix
 Thecash surplus from any cash cows should be used to
support the development of selected question marks &
nurture stars
 The long-term objective is to consolidate the positions
of stars and turn favoured question marks into stars,
thus making the company’s portfolio more attractive
 Questionmarks with the weakest or most uncertain
long-term prospects should be divested to reduce
demands on a company’s cash resources

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 BCG Matrix cont’d …
 Dogs having reached the end of their useful life, are generally
best put to sleep unless they are still performing a useful
function – not merely making a contribution to overheads

 The portfolio must be balanced – when there are

sufficient cash cows, stars & question marks
 If the company lacks sufficient number of these
businesses, it should consider acquisitions & new ventures
to build a more balanced portfolio

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 Limitations of BCG
 The Model is simplistic, only two factors are assessed
(market share & industry growth)
 The connection between relative market share & cost
savings is not as straightforward as BCG suggests
 A business having a low market share can be very profitable
& could have a strong competitive position in certain
segments of a market (e.g., The motor vehicle manufacturer
BMW is in this position)
 A high market share in a low-growth industry does not
necessarily result in the large positive cash flow
characteristic - cash cow business

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Limitations of BCG cont’d …
 The BCG-Matrix lacks the dimension of time. In order to
overcome this problem, some add arrows showing the
direction in which the product is moving

 The names in the cells used as descriptions only, in order

to assign strategic roles to products or services – stars,
dogs, etc.

 The BCG-Matrix shows the position of each portfolio

instead of their sizes
 to get the full picture of the portfolio, in addition to
positions of products, circles are used in which their
sizes are proportional to their contribution to revenue

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Industry Attractiveness-Competitive
Strength Matrix (GE Matrix)
 The GE Nine-Cell Planning Grid is an adaptation of the
BCG

 The GE attempts to overcome some of the limitations of

BCG

 In the GE-Screen, the two main dimensions are presented

by:
 Industry (product-market)
 Attractiveness & Business (competitive) Strength

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 GE Industry Attractiveness-Competitive
Strength Matrix
Business Unit Competitive Strength
10.0 Strong 6.7 Average 3.3 Weak 1.0
Industry Attractiveness

High

6.7

Medium

3.3

Low

1.0
High priority for investment Medium priority for investment
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Low priority for investment

GE Matrix cont’d …
 In GE matrix each of the company’s business units is rated
on multiple sets of strategic factors within each axis of the
grid:

 Factors identified as enhancing Industry Attractiveness

include:
 Sales/market growth

 Size & industry profitability

 Demand cyclicality

 Social, environmental, legal, etc.,

 Competition: Porter’s Five-force model

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 GE Matrix cont’d …
 Factors identified as enhancing
business/competitive strength:
Market share
Profit margin
Customer & market knowledge
Technological know-how & management caliber
Brand image
Cost structure & distinctive competencies etc.
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GE Matrix cont’d …
 Thus, in contrast to the BCG, the GE uses
composite measures

 Accordingly, quantitative measures of industry

attractiveness & business strength are used to plot
location of each business in the matrix

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 GE Matrix cont’d …
 Thecalculation is done subjectively by identifying the two
dimensions
 First, the strategist has to identify those important
factors contributing much to industry attractiveness &
business strength
 Second, assigning each factor a weight that reflects its
perceived importance relative to other factors
 Third, unfavorable & favorable future conditions for
those factors are forecasted & rated based on some scale
(0 to 1 scale)
 Finally,a weighted composite score is then obtained for a
business
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 GE Matrix cont’d …
Example for Industry Attractiveness
Industry attractiveness factor Weight Rating Score
 Market size 20 0.5 10
 Industry profitability 35 1.0 35
 A few large competitors 30 0 0
 Political & regulatory factors 15 1.0 15
Total 100 60

Note: 1.0 = High; 0.5 = Medium; 0 = Low

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GE Matrix cont’d …
Example for Industry Attractiveness
Business strength factor Weight Rating Scale
 Relative market share 20 0.5 10
 Production
 Capacity 10 1.0 10
 Efficiency 10 1.0 10
 Location 20 0.0 0
 Technological capability 20 0.5 10
 Marketing
 Sales organization 15 1.0 15
 Promotion advantage 5 0 0
Total 100 55
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Source: Pearce & Robinson, 1996:289
GE Matrix cont’d …

 These examples illustrate how one business within a

corporate portfolio might be assessed using the GE planning
grid.

 It is a matter of management judgment:

 What should be included or excluded as a factor
 How it should be rated & weighted

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 GE Matrix cont’d …
 What matters is, after rating & weighting all
strategic business units, they will be positioned in
the nine cells accordingly
 Each business unit appears as a circle in its
respective cell & position
Area of a circle is positioned to size of business as
a percent of company revenues or relative size of
industry with pie slice showing the company’s
market share.

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 Strategic Implication of the GE Matrix
cont’d …
 Three basic strategic approaches are suggested for any
business depending on its location within the grid:
1. Businesses in upper left corner
 Accorded top investment priority
 Strategic prescription – invest to grow & build
2. Businesses in three diagonal cells
 Given medium investment priority
 Invest selectively to maintain position & manage for
earnings

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 Strategic Implication cont’d …
3. Businesses in lower right corner
 Candidates for harvesting or divestiture

 May, on occasion, be candidates for an overhaul

& repositioning strategy

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 Strategic Implication cont’d …
Resource Allocation
 The resource allocation decisions remain quite
similar to those in the BCG approach:
Businesses classified as invest to grow would be
treated like the stars in the BCG-Matrix – to
pursue growth-oriented strategies

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Strategic Implication cont’d …
Businesses classified in the invest selectively to
maintain position would either be managed as
cash cows – providing maximum earnings or as
question marks – selectively chosen for investment
or divestment.

Businesses classified in the harvest / divest

category would be managed like dogs – provide
net resources for use in other business units.

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 Strategic Implication cont’d …
 While the strategic recommendations of both GE &
BCG are similar, the GE-Matrix has three
fundamental improvements & advantages:
1. The terminology associated with the GE grid is
preferable because it is less offensive & more
universally understood – Build, hold, harvest,
withdraw, etc.

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Strategic Implication cont’d …
2. Use of more multiple measures (incorporating
several factors) associated with each
dimensions (market attractiveness & business
strength) of the GE than simply market share
& market growth of BCG – broader assessment

3. The nine-cell format allows finer distinction b/n

portfolio positions than does the four-cell BCG
format

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 Overall Summary
 The portfolio approach is useful for examining
alternative corporate level strategies in multi-
industry companies

 Portfolio planning offers three potential benefits:

1. It aids in generating good strategies by promoting
competitive & comparative analysis across the
company’s business units

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 Overall Summary cont’d …
2. It promotes selective resource allocation trade-
offs by providing a visualization of the corporate-
wide strategic issues
3. It helps in the implementation of corporate
strategy because increased focus & objectivity
enhance commitment.
 However, portfolio analysis techniques should be
employed by incorporating managerial judgment,
intuition, heuristics, etc

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Business-Level Strategy

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 BUSINESS-LEVEL STRATEGIC
ISSUES

 Inselecting business-level strategy, the firm should

determine:
Who will be served? Refers to types of customers
What needs those target customers have that the
firm will satisfy? Refers to the benefits & features
of products
How those needs will be satisfied? Refers to core
competencies

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Business-Level Strategy cont’d …
Note:
 Only firms who diligently perform these can
expect to meet & hopefully exceed customers’
expectations across time

 The firm’s relationship with its customers is

strengthened when it is committed to offering them
superior value

 In turn, receiving superior value enhances

customers’ loyalty to the firm – helps to develop a
new competitive advantage 35
 Business-Level Strategy cont’d …
Business-level strategy:
 Isa deliberate choice about how a firm will perform
the value chain’s primary & support activities in ways
that create unique value
 Reflects where & how the firm has an advantage over
its rivals
 Isintended to create differences b/n the firm’s
position relative those of its rivals

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Business-Level Strategy cont’d …
 Thus, the essence of a firm’s business-level strategy
is choosing to:
 Perform activities differently than rivals – to achieve
lowest cost or
 Perform different (valuable) activities – being able to
differentiate

 Hence,competitive advantage is achieved within

some scope – firms should prefer one of the two

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 Business-level strategy
The Five business-level Strategies
Competitive Advantage
Lower Cost Uniqueness
Competitive Scope

Broad Target
(Market Target)

Cost L/Ship Differentiation

Integrated Cost L/ship

/ Differentiation

Focused Cost Focused

Narrow Target
L/ship Differentiation
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 The Five Business - Level
Competitive Strategies
 The two basic types of competitive advantages a
firm can posses are low cost or differentiation
 they are important to cope with the five forces based on
an industry structure

 The two basic types of competitive advantage

combined with the competitive scope lead to three
generic strategies for achieving above-average
performance (cost leadership, differentiation &
focus)
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 The Five Business - Level Competitive
Strategies cont’d …
 The focus strategy has two variants: cost focus &
differentiation focus
Thus, a focus strategy is an integrated set of
actions designed to produce & deliver
goods/services that serve the needs of a
particular competitive segment

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The Five cont’d …
 The fiveB-L strategies are:
1. Cost leadership
2. Differentiation
3. Focused cost leadership
4. Focused differentiation
5. Integrated cost leadership and differentiation

41
 The Five cont’d …
 Cost leadership: lowest cost to produce acceptable features to all
customers

 Differentiation: differentiated features rather than low cost for

customers who value differentiation

 Focused cost leadership: refers to targeting those specific

customers with low cost
 Focused differentiation: refers to targeting those specific customers with
a differentiated product (e.g., Rolls Royce motor cars, Ferrari sport cars,
Italian shoes from natural materials & man work ship)

 Integrated cost leadership & differentiation: according to Porter,

this strategy was referred initially as “stuck in the middle”
 Meaning, neither the lowest cost nor a differentiated firm
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
The Five cont’d …
Note:
 None of the five business-level strategies is
inherently or universally superior to others
 The effectiveness of each strategy is contingent both
on the opportunities & threats in a firm’s external
environment & on the possibilities provided by the
firm’s unique resources & capabilities (core
competencies)
 It is critical, therefore, for the firm to select an
appropriate strategy in light of its external
conditions & competencies
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Cost Leadership Strategy
Definition
A cost leadership strategy is an integrated set of
actions designed to produce or deliver goods or
services at the lowest cost relative to competitors,
with features that are acceptable to customers
Lowest competitive price
Features acceptable to many customers
Relatively standardised products

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Cost Leadership Strategy cont’d …
 Cost saving actions required by this strategy:
 Building efficient scale facilities
 Tightly controlling production costs and overhead

 Simplifying production processes and building efficient

manufacturing facilities
 Minimising costs of sales, R&D and service

 Monitoring costs of activities provided by outsiders

 Gaining a unique access to a large source of lower cost

materials.
 Making optimal outsourcing

 Vertical integration decisions

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Cost Leadership Strategy cont’d …
Economies of Scope
 Economies of scope occur through a firm’s ability
to spread costs associated with one element of the
value chain across multiple products, thereby
reducing costs.
 For example, Sharp achieves economies of scope
through spreading the costs of running their
distribution networks etc across a range of products.

46
Cost Leadership Strategy cont’d …
Accumulated Experience
 As a person or a firm gains experience in
completing a task, they become more
efficient at doing it.
 This process can occur through:
learning or experience
technical progress

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Cost Leadership Strategy …

Potential entrants
 Firm can frighten off potential new
entrants due to:
Their need to enter on a large scale in order
to be cost competitive
The time it takes to move down the learning
curve
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Cost Leadership Strategy and cont’d …

Bargaining power of suppliers & buyers

 Can mitigate suppliers’ power by:
 Being able to absorb cost increases due to low cost
position
 Being able to make very large purchases, reducing
chance of suppliers using power

 Can mitigate buyers’ power by:

 Driving prices far below competitors and causing them to
exit, thus shifting the power of the buyers back to the
firm
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Cost Leadership Strategy and cont’d …
Product substitutes & rivalry among existing
competitors
 Cost leader is well positioned to:
 Make investments to be first to create substitutes
 Buy patents developed by potential substitutes
 Lower prices in order to maintain value position

 Due to cost leader’s advantageous position:

 Rivalshesitate to compete on the basis of price
 Lack of price competition leads to greater profits

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Competitive Risks of the Cost Leadership
Strategy
 Processes used to produce & distribute goods or services
may become obsolete due to competitors’ innovations ( eg.
War between apple and Samsung phones).

 Focus on cost reductions may occur at the expense of

customers’ perceptions of differentiation encouraging them
to purchase competitors’ products & services.

 Competitors, using their own core competencies, may learn

to successfully imitate the cost leader’s strategy.

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Differentiation Strategy
Definition
 A differentiation strategy is an integrated set of
actions designed to produce goods or services
that customers perceive as being different in
ways that are important to them.

 The firm produces non-standardized products

for customers who value differentiated features
more than they value low cost.

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Differentiation Strategy cont’d …
 Continuous success with the differentiation
strategy results when the firm consistently
upgrades differentiated features that
customers value, without significant cost
increases.

 The ability to sell goods or services at a price

that substantially exceeds the cost of creating
its differentiated features allows the firm to
outperform rivals and earn above-average
returns

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 Examples of Approach for
Differentiation
 Products with unusual features (eg. Samsung smart
phones)
 Responsive customer service

 Rapid product innovation and technological leadership

 Perceived prestige and status

 Different tastes

 Engineering design and performance

A firm’s value chain can be analyzed to determine

whether the firm is able to link the activities required
to create value by using the differentiation strategy 54
Differentiation Strategy and the Five
Competitive Forces
Potential entrants
Can defend against new entrants because:
– Entrants’ new products must surpass proven
products

– Entrants’ new products must be at least equal

to performance of proven products, but
offered at lower prices

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Differentiation Strategy and cont’d …
Bargaining power of suppliers and
buyers
•Can mitigate suppliers’ power by:
 Absorbing price increases due to higher margins
 Passing along higher supplier prices because buyers are
loyal to differentiated brand
•Can mitigate buyers’ power by:
 Well differentiated products reduce customer sensitivity
to price increases

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Differentiation Strategy and cont’d …
Product substitutes and rivalry among existing
competitors
•Well positioned relative to substitutes because:

 Brand loyalty to a differentiated product tends to reduce

customers’ testing of new products or switching brands
•Well positioned relative to competitors because:

 Brand loyalty to a differentiated product tends to offset

price competition

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 Competitive Risks of the
Differentiation Strategy
 The price differential between the differentiator’s product
and the cost leader’s product becomes too large
 Differentiation ceases to provide value for which
customers are willing to pay
 Experience narrows customers’ perceptions of the value
of a product’s differentiated features
 Counterfeit goods replicate differentiated features of the
firm’s products at significantly reduced prices

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 Focus Strategy
 Definition
A focus strategy is an integrated set of actions
designed to produce or deliver goods or services
that serve the needs of a particular competitive
segment.
Firms choose a focus strategy when they want
their core competencies to serve the needs of a
particular industry segment or niche at the
exclusion of others.
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 Focus Strategy cont’d …
 Examples of specific market segments that can be
targeted by a focus strategy:
Particular buyer group (e.g. youths or senior
citizens)
Different segments of a product line (e.g.
professional craftsmen versus do-it-yourselves)
Different geographic markets

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 Focus Strategy cont’d …
 Types of focused strategies:
 Focused cost leadership strategy
 Focused differentiation strategy
 To implement a focus strategy, the firm must be able to
complete various primary and support value chain
activities in a competitively superior manner, in order to
develop and sustain a competitive advantage and earn
above-average returns
 Competitor firms may overlook small niches
 The firm lacks resources needed to compete in the
broader market, but serves a narrow segment more
effectively than industry-wide competitors.

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 Competitive Risks of the Focus Strategies
 The focuser firm may be ‘out focused’ by its
competitors
 A firm competing on an industry-wide basis
decides to pursue the niche market of the focuser
firm.
 Customer preferences in the niche market may
change to more closely resemble those of the
broader market. As a result, the advantages of a
focus strategy are either reduced or eliminated.

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 Integrated Cost Leadership /Differentiation
Strategy
 A firm that successfully uses the integrated cost
leadership/differentiation strategy should be in a better
position to:
 Adapt quickly to environmental changes
 Learn new skills and technologies more quickly
 Effectively leverage its core competencies while
competing against its rivals
 A commitment to strategic flexibility is necessary for
successful use of this strategy

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Competitive Risks of the Integrated Cost Leadership
/Differentiation Strategy
 Often involves compromises
 Becoming neither the lowest cost nor the most
differentiated firm
 Becoming ‘stuck in the middle’
middle
 Lacking the strong commitment and expertise that
accompanies firms following either a cost leadership
or a differentiated strategy
 Earning below-average returns
 Competing at a disadvantage
 Even so, the integrated strategy is an appropriate choice for firms
possessing the core competencies to produce somewhat differentiated
products at relatively low prices
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THANK YOU!

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